Reviews the book  Investing in China: Legal, Financial and Regulator Risk,  by William B. Gamble

Prime, Penelope B.

English

ScholarWorks @ Georgia State University

Georgia State UniversityScholarWorks @ Georgia State UniversityInternational Business Faculty Publications Institute of International Business2005William B. Gamble, "Investing in China: Legal,Financial and Regulatory Risk""Penelope B. PrimeGeorgia State University, pprime@gsu.eduFollow this and additional works at: http://scholarworks.gsu.edu/intlbus_facpubPart of the International Business CommonsThis Review is brought to you for free and open access by the Institute of International Business at ScholarWorks @ Georgia State University. It hasbeen accepted for inclusion in International Business Faculty Publications by an authorized administrator of ScholarWorks @ Georgia State University.For more information, please contact scholarworks@gsu.edu.Recommended CitationPenelope B. Prime , "William B. Gamble,Investing in China: Legal, Financial and Regulatory Risk," Economic Development andCultural Change 53, no. 3 (April 2005): 765-767. DOI: 10.1086/426415.Reviews 765Hill, Polly. 1986. “Kerala Is Different.” Modern Asian Studies 20, no. 4:779–92.Kotz, D. M., M. T. McDonough, and M. Reich, eds. 1994. Social Structures ofAccumulation: The Political Economy of Growth and Crisis. Cambridge: CambridgeUniversity Press.Munro, Ross H. 1993. “The Loser: India in the Nineties.” National Interest, no. 32(Summer): 62–69.William B. Gamble. Investing in China: Legal, Financial and Regulatory Risk. Westport,CT: Quorum Books, 2002. Pp. 249. $49.95.penelope b. primeKennesaw State UniversityWilliam Gamble provides a detailed analysis of the legal framework in Chinacovering company, contract, real estate, and tax law. Gamble goes far beyonda list of laws by discussing the economic incentives embedded in laws in theChinese context as well as offering specific examples of effects on both Chineseand foreign companies. This book should be useful to companies and academicsin understanding the changing business environment in China today. Thisstudy provides good detail that is not readily available in one place elsewhere,as well as a context, albeit negative, for this information.This study is certainly timely. One cannot pick up a newspaper or businessmagazine without finding an article on the rapid growth of foreign investmentin China. These trends have gone on for quite some time, but recently ac-celerated after China joined the World Trade Organization (WTO) in late2001. Since then China has exceeded even the United States in dollar valueof foreign investment. People in many countries—both developing and de-veloped alike—are increasingly fearful of jobs moving to China as it becomesa manufacturing center for the global economy. China appears to be successfullycombining skilled labor with low labor costs to produce quality output thatcan be priced very competitively. The clear message of these trends is thatcompanies cannot afford to ignore China.From page 1, however, Gamble sends a different message. His broad con-clusion is that foreign companies should not invest in China, or, if they do,they must be prepared to deal with monumental and costly risk. In addition,he sees accession to the WTO as continuing, and maybe even compounding,the risks for a long time to come.Does this mean that those investing in China are ignorant or simply sorisk-loving as to qualify as speculators? There is no doubt that investors would766 economic development and cultural changebenefit from access to more information like that which Gamble provides. Onthe other hand, the book’s timeframe and sources may be biasing the authortoward an overly negative view of the economic and legal situation in China.Gamble’s stated approach is to analyze whether or not the economic in-centives within the legal system in China are efficient (3–4). He relies heavilyon the concept of transaction costs derived from the Coase theorem for thisanalysis. If transaction costs are low enough, then other problems, such asweak property rights, can be overcome through bargaining to obtain an out-come that allocates resources efficiently. He devotes a chapter each to contractlaw, bankruptcy and credit systems, the legal structure, securities law, corporategovernance, real estate law, and tax law. Each chapter begins with a descriptionof a horror story of how a company got caught in some aspect of the law.Gamble then discusses the current situation relating to the topic at hand anddraws out the implied inefficiencies for both Chinese and foreign companies.One of the weaknesses of this approach is the lack of historical perspective.One gets the impression that we are comparing the situation in China to theU.S. legal system today. This is not a fair comparison. Gamble wrote this bookin the late 1990s. He could not have written it much sooner, as most of theselaws are quite recent. The fact that China has quickly moved from a nonlegalenvironment to one that has a legal system and is beginning to incorporatelaws into business and personal life is missed. While far from a well-functioninglegal environment, this change is remarkable and is probably one of the reasonscompanies have been willing to invest in China.Another related problem with Gamble’s approach is that his examples areanecdotal, drawn unsystematically from English language sources available onthe Internet. Strung together, the impression presented is truly frightening.However, successes do exist: Lenovo Group (formerly Legend) and Hai’er onthe Chinese side, and Volkswagen and Coca Cola on the foreign side, to namea few. In addition, China’s economy has grown impressively, with householdsbenefiting from higher incomes and consumption. This growth would not bepossible without some progress in increasing inputs and efficiency.Unless, of course, one believes that all of these data are false and that growthin fact has not occurred. Gamble implies this when he references ThomasRawski’s work on China’s statistics (92), but elsewhere he seems to accept thatChina has made economic progress. In any case, Gamble does not deal withthe data-accuracy issue in depth, and it is hard to believe that the story isthat simple.One of the book’s major themes deals with the decentralization of powerthat has occurred as a result of numerous market-oriented reforms. Gambleargues that the central government has decided to develop the legal systemReviews 767to regain power over the localities, but that this will fail because members ofthe Chinese Communist Party (CCP) will block enforcement of laws if it meansthey will lose power and riches. And, of course, being a one-party system, theCCP does not answer to anyone else. Indeed, many of his examples involvegovernment officials.This is an important proposition. If there are elements within the Chinesesystem with the power and incentives to block reform, then eventually theeconomic progress reaped from earlier reforms will wear thin. Gordon Chang,for example, argues in his book The Coming Collapse of China (2001) that thelack of political reform means that China’s future is doomed to economicfailure. Chang’s conclusion follows from an assumption that those with un-restricted political power will always have the incentive and capability to extractrents from or take over, and ruin, the profitable endeavors. Gamble’s argumentends up in fundamentally the same place as Chang’s.The problem with Gamble’s presentation of this argument is that we haveto ask, Who is the “government,” and does everyone in the government havethe same incentives? For example, while many government officials are CCPmembers, many are not. In addition, in the central leadership, almost all areCCP members. This suggests the main conflict might be between the centraland local levels of both the CCP and government rather than the CCP beingthe primary obstacle of progress.The underlying question is whether the benefits of change appear greaterthan the costs to enough of those people who could block that change, orwhether the central leadership can force change despite fears of losses by thoseaffected. For example, there was significant opposition to China joining theWTO from certain central ministries as well as people in local government,as there has been opposition to many of the reforms along the way. Nonetheless,reform has progressed in China beyond what most analysts and Chinese citizensthought possible. At least some of China’s leaders, as well as investors, arebetting on positive change continuing.ReferenceChang, Gordon. 2001. The Coming Collapse of China. New York: Random House.

William B. Gamble,  Investing in China: Legal, Financial and Regulatory Risk

Georgia State University

Georgia State University
ScholarWorks @ Georgia State University
International Business Faculty Publications Institute of International Business
2005
William B. Gamble, "Investing in China: Legal,
Financial and Regulatory Risk""
Penelope B. Prime
Georgia State University, pprime@gsu.edu
Follow this and additional works at: http://scholarworks.gsu.edu/intlbus_facpub
Part of the International Business Commons
This Review is brought to you for free and open access by the Institute of International Business at ScholarWorks @ Georgia State University. It has
been accepted for inclusion in International Business Faculty Publications by an authorized administrator of ScholarWorks @ Georgia State University.
For more information, please contact scholarworks@gsu.edu.
Recommended Citation
Penelope B. Prime , "William B. Gamble,Investing in China: Legal, Financial and Regulatory Risk," Economic Development and
Cultural Change 53, no. 3 (April 2005): 765-767. DOI: 10.1086/426415.
Reviews 765
Hill, Polly. 1986. “Kerala Is Different.” Modern Asian Studies 20, no. 4:779–92.
Kotz, D. M., M. T. McDonough, and M. Reich, eds. 1994. Social Structures of
Accumulation: The Political Economy of Growth and Crisis. Cambridge: Cambridge
University Press.
Munro, Ross H. 1993. “The Loser: India in the Nineties.” National Interest, no. 32
(Summer): 62–69.
William B. Gamble. Investing in China: Legal, Financial and Regulatory Risk. Westport,
CT: Quorum Books, 2002. Pp. 249. $49.95.
penelope b. prime
Kennesaw State University
William Gamble provides a detailed analysis of the legal framework in China
covering company, contract, real estate, and tax law. Gamble goes far beyond
a list of laws by discussing the economic incentives embedded in laws in the
Chinese context as well as offering specific examples of effects on both Chinese
and foreign companies. This book should be useful to companies and academics
in understanding the changing business environment in China today. This
study provides good detail that is not readily available in one place elsewhere,
as well as a context, albeit negative, for this information.
This study is certainly timely. One cannot pick up a newspaper or business
magazine without finding an article on the rapid growth of foreign investment
in China. These trends have gone on for quite some time, but recently ac-
celerated after China joined the World Trade Organization (WTO) in late
2001. Since then China has exceeded even the United States in dollar value
of foreign investment. People in many countries—both developing and de-
veloped alike—are increasingly fearful of jobs moving to China as it becomes
a manufacturing center for the global economy. China appears to be successfully
combining skilled labor with low labor costs to produce quality output that
can be priced very competitively. The clear message of these trends is that
companies cannot afford to ignore China.
From page 1, however, Gamble sends a different message. His broad con-
clusion is that foreign companies should not invest in China, or, if they do,
they must be prepared to deal with monumental and costly risk. In addition,
he sees accession to the WTO as continuing, and maybe even compounding,
the risks for a long time to come.
Does this mean that those investing in China are ignorant or simply so
risk-loving as to qualify as speculators? There is no doubt that investors would
766 economic development and cultural change
benefit from access to more information like that which Gamble provides. On
the other hand, the book’s timeframe and sources may be biasing the author
toward an overly negative view of the economic and legal situation in China.
Gamble’s stated approach is to analyze whether or not the economic in-
centives within the legal system in China are efficient (3–4). He relies heavily
on the concept of transaction costs derived from the Coase theorem for this
analysis. If transaction costs are low enough, then other problems, such as
weak property rights, can be overcome through bargaining to obtain an out-
come that allocates resources efficiently. He devotes a chapter each to contract
law, bankruptcy and credit systems, the legal structure, securities law, corporate
governance, real estate law, and tax law. Each chapter begins with a description
of a horror story of how a company got caught in some aspect of the law.
Gamble then discusses the current situation relating to the topic at hand and
draws out the implied inefficiencies for both Chinese and foreign companies.
One of the weaknesses of this approach is the lack of historical perspective.
One gets the impression that we are comparing the situation in China to the
U.S. legal system today. This is not a fair comparison. Gamble wrote this book
in the late 1990s. He could not have written it much sooner, as most of these
laws are quite recent. The fact that China has quickly moved from a nonlegal
environment to one that has a legal system and is beginning to incorporate
laws into business and personal life is missed. While far from a well-functioning
legal environment, this change is remarkable and is probably one of the reasons
companies have been willing to invest in China.
Another related problem with Gamble’s approach is that his examples are
anecdotal, drawn unsystematically from English language sources available on
the Internet. Strung together, the impression presented is truly frightening.
However, successes do exist: Lenovo Group (formerly Legend) and Hai’er on
the Chinese side, and Volkswagen and Coca Cola on the foreign side, to name
a few. In addition, China’s economy has grown impressively, with households
benefiting from higher incomes and consumption. This growth would not be
possible without some progress in increasing inputs and efficiency.
Unless, of course, one believes that all of these data are false and that growth
in fact has not occurred. Gamble implies this when he references Thomas
Rawski’s work on China’s statistics (92), but elsewhere he seems to accept that
China has made economic progress. In any case, Gamble does not deal with
the data-accuracy issue in depth, and it is hard to believe that the story is
that simple.
One of the book’s major themes deals with the decentralization of power
that has occurred as a result of numerous market-oriented reforms. Gamble
argues that the central government has decided to develop the legal system
Reviews 767
to regain power over the localities, but that this will fail because members of
the Chinese Communist Party (CCP) will block enforcement of laws if it means
they will lose power and riches. And, of course, being a one-party system, the
CCP does not answer to anyone else. Indeed, many of his examples involve
government officials.
This is an important proposition. If there are elements within the Chinese
system with the power and incentives to block reform, then eventually the
economic progress reaped from earlier reforms will wear thin. Gordon Chang,
for example, argues in his book The Coming Collapse of China (2001) that the
lack of political reform means that China’s future is doomed to economic
failure. Chang’s conclusion follows from an assumption that those with un-
restricted political power will always have the incentive and capability to extract
rents from or take over, and ruin, the profitable endeavors. Gamble’s argument
ends up in fundamentally the same place as Chang’s.
The problem with Gamble’s presentation of this argument is that we have
to ask, Who is the “government,” and does everyone in the government have
the same incentives? For example, while many government officials are CCP
members, many are not. In addition, in the central leadership, almost all are
CCP members. This suggests the main conflict might be between the central
and local levels of both the CCP and government rather than the CCP being
the primary obstacle of progress.
The underlying question is whether the benefits of change appear greater
than the costs to enough of those people who could block that change, or
whether the central leadership can force change despite fears of losses by those
affected. For example, there was significant opposition to China joining the
WTO from certain central ministries as well as people in local government,
as there has been opposition to many of the reforms along the way. Nonetheless,
reform has progressed in China beyond what most analysts and Chinese citizens
thought possible. At least some of China’s leaders, as well as investors, are
betting on positive change continuing.
Reference
Chang, Gordon. 2001. The Coming Collapse of China. New York: Random House.



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